What does this mean? SMLLCs are ineffectual in protecting LLC assests against charging orders.
Charging order protection shields your partner’s interest in the LLC from exposure to a lawsuit arising from your personal activities outside the LLC. A single member LLC has no partners, and thus the charging order protection afforded the “non-offending” LLC partners is of little consequence.
Check out In re Albright for the case law to better understand how charging order applies to the SMLLC in bankruptcy. Olmstead v. FTC put the charging order protection of multi-member FL LLCs into question and the matter will probably end up before the Legislature. Courts in states without charging orders as an exclusive remedy may rule in a similar.
Regardless, imagine your LLC under this charging order.
- No one can take money out of the LLC (including non-debtor members) without the creditor’s approval.
- The LLC cannot loan money to anyone without the creditor’s approval.
- The LLC cannot purchase major assets without the creditor’s approval.
- The LLC cannot sell major assets
- A receiver is appointed at a cost of something on the order of $600/hour (and sometimes the creditor gets a piece of that).
How soon will the non-debtor members decide to pay off the creditor?